EU: Euro-zone in recession

by Multiple Authors on Nov 14, 2008, under Edge

BRUSSELS, Belgium – The 15 countries that use the euro are officially in a recession, the European Union said Friday, as their economies shrank for a second straight quarter because of the world financial crisis and sinking demand.

The euro zone shrank 0.2 percent in both the third and second quarters from the quarter before, further stoking expectations the European Central Bank will cut interest rates to limit the economic damage. Two successive quarters of shrinkage is one common definition of a recession.

The spending slowdown and tight credit conditions have industry hurting across the continent: carmakers, a major source of exports in countries like Germany, said sales are slumping. Car sales in October slumped 14.5 percent in October from the previous year, the sixth consecutive monthly fall, the ACEA industry association said.

The worry is that the sharp reining in of personal spending will push the jobless rate much higher in the months to come. So far, euro-zone economies — with 16 percent of world output and 319 million people — have not seen unemployment surge, though the EU executive Commission estimates that it will rise steadily over coming months.

“The euro-zone is not immune to what’s going on in the world economy generally, and exporting nations, like Germany, are totally plugged into the fortunes of the world economy,” said Neil Mackinnon, chief economist at ECU Group. “We’re in for a pretty severe economic slump.”

Markets are pricing in the likelihood of another half-percent interest rate from the European Central Bankat its next rate-setting meeting in early December, but many analysts think that with inflation easing it should move more boldly and cut its benchmark rate a full percentage point, from the current 3.25 percent to 2.25 percent.

Cuts spur growth by reducing borrowing costs but can also make inflation worse; with oil prices easing, however, many think the downturn is dire enough to make the bank keep on cutting.

It is the first such slump faced by the ECB since the euro was introduced in 1999 and it took over interest rates for the countries using the currency.

“The clear deterioration in the economy and ongoing signs that the euro area corporate sector faces difficulties to access finance suggests that the ECB should be taking some insurance against the risks of what could turn out to be a much deeper downturn,” said Jacques Cailloux, European economist at the Royal Bank of Scotland.

The bank last cut rates a half-point on Nov. 6.

The EU confirmed that two of the euro-zone’s largest economies — Germany and Italy — joined Ireland in recession after posting 0.5 percent declines in the third quarter, and that France narrowly escaped, having expanded 0.1 percent in the third quarter after shrinking in the second quarter.

Spain contracted a quarterly 0.2 percent in the third quarter and is predicted by analysts to enter an official recession when the next quarter figures are published in early 2009 because of its slumping housing market.

The last major recession to hit European economies was in 1993 when each country controlled its own monetary policy and could react individually to economy problems. Euro-zone nations face more trouble in acting alone now and must consult the EU executive before launching major programs to kickstart the economy with deficit spending and state subsidies.

It’s not just countries using the euro that are in trouble. Estonia and Latvia — until recently part of the Baltic boom — are in recession. Britain’s economy shrank 0.5 percent in the last quarter.

Overall, the 27-nation EU has so far escaped recession — barely — thanks to growth in a number of countries in eastern Europe, such as the Czech Republic and Lithuania. The EU shrank 0.2 percent in the third quarter after zero growth in the second quarter-on-quarter.

The one bright spot on the horizon is that plummeting oil prices brought the annual inflation rate in the euro-zone down to 3.2 percent in October.

The rate of price increases has been gradually falling from a record high of 4 percent in June and July but is still well above the European Central Bank’s guideline of just under 2 percent that it looks to when it considers hiking or lowering interest rates.

On a year-on-year basis, the euro-zone grew 0.7 percent, down on the 1.4 percent recorded in the second. For the full 27-member EU, growth more than halved on a year-on-year basis to 0.8 percent in the third quarter from 1.7 percent in the second.

By Aoife White, Pan Pylas

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